Retirement benefits such as 401(k) plans are, in most cases, considered marital property to be divided during a divorce. There are many factors that can influence the division of a 401(k), and the legal process is important for Texas residents undergoing a divorce to understand. If division of a retirement plan is handled correctly, there is no early withdrawal tax, but if it is handled incorrectly, then the owner of the plan will be subject to the tax penalty on money they are giving to a spouse.
Because Texas is a community property state, all marital assets are subject to an equal distribution. The only way a plan would be exempt is if the entirety of the plan was created and funded before the marriage, and no funds were added during the marriage. This is unlikely to be the case, so those with retirement plans should be prepared to surrender half of the value to their spouse upon divorce.
A retirement plan is split using a qualified domestic relations order. The QDRO validation process ensures that the money is going to the proper beneficiary and is not subject to the early withdrawal tax. The verification process is relatively simple, but the regulations are strict. Failure to follow any part of the verification process could result in the money being taxed. Many employers also have samples of how a QDRO will work with their plans.
The division of retirement plans can be one of the more complicated parts of property division. An attorney may be able to help ensure that the plan is divided properly to avoid the tax penalty that would otherwise be associated with it. An attorney might also be able to help draft a prenuptial agreement that would protect the value of a 401(k) from property division.
Source: 401k.org, “401(k) and Divorce”, December 31, 2014